What will happen to the Euro? I am not asking “what should happen”, but what will happen. Take this opportunity to put your predictions on the internet, and later be hailed as a true prophet or derided as a false one.
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Discussion Point XXXVINatalie Solent (Essex) · Economics, Business & Globalization · European affairs · European Union · Events November 3rd, 2011 |
 32 comments to Discussion Point XXXVI |
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The southern countries in debt trouble are out, unless one of them can make an austerity package with real balls stick. I don’t see that as likely, so I’d put odds at 80%+ that all of Greece, Spain, and Italy have their own currencies within 5 years. 95% that at least one does – I simply don’t see a viable path to keeping Greece afloat, let alone Italy if its debt starts to spiral.
The real question, to my mind, is whether the Euro collapses entirely, or whether the less-screwed northern countries can make a real go of it. There’s nothing really difficult about a Franco-German currency union, the two are close and friendly enough that it’s not awful, and throwing in Benelux and Scandinavia works almost as well. I’d put odds at about 60% that the Euro is still a major world currency in 5 years – perhaps not the obvious #2 like it is now, but in the top five. That’s mostly dependant on the timing of an economic recovery – if things get better soon, the bailouts get less painful and the existing debt loads can be tolerated. If not, then France is likely to fall in a few years time, and at that point you might as well just go back to calling Euros “Deutschemarks” again.
Back on October 26 I made the following (totally unresearched) prediction to some of my internet friends. I put at least one minute into thinking about it. Maybe two.
Since I have not been paying much attention at all, this prediction is probably utter nonsense. I based it on two things only – the nature of the problem and the nature of EU governance.
The Euro will be the working currency of the core group of nations: Germany, France, Italy, Spain. The rest will revert to their former currency, but within a new version of the “snake”: that is, allowed to fluctuate within boundaries specified by Brussels. The ECB will be in charge of policing the boundaries, and will have the power to vary the boundaries for a nation. Thus a co-ordinated European monetary and economic policy will emerge. This solution will last until a new George Soros emerges to game the system and until the total number of exceptions made equals the GDP in Euros of Belgium.
Greece will leave it, followed by Spain, Portugal, and Poland – timescale 2 to 12 months. It will then shrink to France, Germany, and hangers on such as Italy which need it for some semblance of structure and discipline – timescale 6 to 24 months. Political pressure will persuade Germany to leave it, and then it will collapse – timescale 18 to 36months.
In 100 years it will still survive, as the currency of an impoverished and obscure 3rd world country called Europa, within the borders of today’s Germany, France and Belgium. Parents will still frighten children with tales of the evil rulers Burly Sconey and Papa Drew who caused their downfall.
I’m predicting some sort of side-by-side system, where some countries break off, but a ton of businesses still honor it even in countries with their own currency.
“What will happen to the Euro?”
There’s only one left?
God. That really WAS a liquidity crisis.
What if it was called something else – not the Euro? A bit like Mr Dog being re-branded as Caesar or Snickers being the new name for Marathon.
There must be a word in Esperanto that covers it, except that Esperanto died the death too.
The euro will survive. Greece and other countries in a similar position will partially default on their currencies. And/or their debt will be monetised by the ECB. The result is a massive wealth transfer from Germany to the poorer countries.
The main threat to the Euro is Germany saying enough of this shit already, and resurrecting the D-mark.
Note that this crisis is not a fiscal crisis of a few periphery countries and not a monetary crisis. There is no need for the Euro to get dragged into this. Its not like we kick Scotland and Wales out of sterling for being relatively crap economies.
Longer term it will be interesting to see whether the appetite for holding fiat currency will diminish as a result of this brouhaha. Fiat currency survived the 70s, but there were many fewer alternatives then.
ALL Euro bondholders will be given a 90% haircut in the interests of “fairness” allong with mass nationalisation of banks.
The Greek crisis keeps changing the parameters. If the current PM is kicked out, the Greeks will default very soon, thus destroying the Euro system. It will be replaced by a central Euro, managed by Germany- the Euro-Mark?
It is not at all clear that it is possible to dissolve a currency union of unequal regions once it is created. Any scenario that you might propose, weak counties leave, strong counties leave or it is wrapped up and everybody leaves all result in a substantial transfer of capital from the weaker to the stronger that would be fatal for the weaker members.
So I think the euro will survive.
The bigger question is will the EU survive? It is a fundamentally socialist organisation and it is running out of taxpayers money. If growth doesn’t return soon the future of the currency will be irrelevant.
Enter the E-mark 😀
Time line: 10 to 20 years. The EU will disolve because the govenments who created it will essentially dissolve; the notion of the euro as a single currency across borders will dissolve though it may remain the nominal currency of one or more states. Nationalism will increase; in fact, some nations will split along old tribal, ethnic, or political lines. National currencies may reemerge but the actual measure of prices will be metals.
The rationale: as today’s currencies become more and more worthless, govenments will have less to spend on supporting their current structure. First, expected services will wither, causing fewer people to pledge their allegiance to the state. Second, states will attempt to overcome this probllem by increasing the tax burden on their people, resulting in even less popular support for the government. Third, governments will respond by attempting ever more authoritarian rule. This will, in most cases, fail, since there will less money available for that kind of activity and current events have shown the possibilities of insurrectional success. There will be much unrest and violent resistance will become the norm. With the resulting weakening of govenments, there will be a reduction in the attention paid to an establishment by individuals and more activities carried out by individuals without regard for what passes as the law. The emerging black markets will, by force of weight, become the white market.
The fly in the ointment: Governments will respond to these changes by the historical method. They will attempt to restore their “goodness” by the creation of enemies. Wars will result and the will of government may triumph at the cost of freedom. Interestingly, with the current willingness of the various governments to work together, it is not all paranoid to consider the possibility that such “enemies” would be cooperative. Thus two peoples may go to war against each other (but their governments are on the same side.) Unless the independent press, by which I mean the internet or its successor, can penetrate the propogandist firewall that will be a certain part of governments’ toolkits, citizens will again be tricked into depending on government for defense. And so we go back to the beginning.
Allan, I like your thinking, except for the missing piece in the rationale of searching for a saviour.
So my prediction is that Greece & Italy will leave, a time of turmoil will result, and some strong leader-type will present an amazingly attractive answer, causing them to re-enter as Europa tries to regain its prestige and power.
10 years from now, we’ll have the EU, but “under different management”.
In 18 months, I see only the Germany, the Baltic states, France & the Benelux countries remaining . France will leave in 3 to 5 years after it becomes apparent how monetarily inflexible the ecb in Frankfurt is. Germany leverages its role to put the screws on central Europe and viola we have 1905 again.
In 18 months, I see only the Germany, the Baltic states, France & the Benelux countries remaining . France will leave in 3 to 5 years after it becomes apparent how monetarily inflexible the ecb in Frankfurt is. Germany leverages its role to put the screws on central Europe and viola we have 1905 again.
In all seriousness, is there a chance the EU might try and put in a “stabilisation force” if public strikes lead to loss of order in Greece?
If they do then whats the chances of a terrorist/shooting war then?
Remember the EU doesnt give a rats ass about soverignty of countries.
Thats probably my nightmare scenario, the EU using disorder to justify use of force. (What used to be called invasions or wars in the bad old pre-EU days)
The Germans have used the Euro to keep their exports going for the same reason that the Chinese have “modified” the reninmneybyyedyby to their ends.
They will fight tooth and nail to keep at least some of the dodgy partners involved to stop the NEW EURO being to strong for their export market.
One by one the dodgy economies will leave as the “unfair” austerity measures kick in until it is just Old Prussia and France left. By this time the French economy will be in meltdown and this will have the desired effect of keeping the NEW EURO devalued for the German export market and at last germany has its old empire back, plus France.
France revolts and birngs back the Franc and Germany is free to take over old prussia.
All this over a 20 year period while trade and economies stagnate lots of money is printed and people cleverer than me tell us it is the right thing to do.
My vote is on the Euro remaining in some way or another, even if it is just a term of cross-border accountancy as a common reference point, in the way percentages are. A nominal idea whose value is not backed by anything other than words.
My question is in twenty years time how many countries will want to even use the reference point of the EU in any way? My betting is on no one as sovereign nations slowly reinvent themselves. Outwardly they will pay lip-service to the noble ideal of a united Europe, privately they will recognise the great experiment hasn’t worked.
Cue disgruntled socialists and miffed French farmers…
Greece will decide to default on their debts and will either be ejected from the Eurozone, the EU or possibly both.
This will start the dominos falling as banks who are exposed to Greek debt will either fail or be taken over by their governments. This will cause a cascade effect, resulting premiums rising for all threatened countries (Italy, Portugal, Ireland, Belgium, Spain, France – roughly in that order).
Those countries that are in or near a primary budget surplus will default (certainly Italy during 2012-2014) others will attempt austerity measures and to balance their budgets, but as soon as premium on government debt goes above about 8% – that’s effectively game over.
Collapse of the Eurozone to the core Northern European industrial countries (German, Netherlands, Austria + smaller members without debt problems).
Longer term (30-50 years), I can see EU transforming into a Federal EU core (France, Germany, Holland, Austria + smaller members) with a larger outer trade zone covering the current EU + Switzerland, some former Russian states, Yugoslavia’s broken pieces and Turkey.
Outer core will repeal non-trade related EU legislation (Human Rights, Working Time, etc.) and replace with their own laws.
If Marine Le Pen wins the presidential election in 2012, France will leave the euro and try to introduce a gold and silver backed currency.
Every other policy proposal of hers I completely disagree with, but this one would certainly put the proverbial cat among the pigeons.
I rate this about 30% probable. How other governments react would be interesting…
To examine, let alone answer, this issue, we should first deal with what is the Euro at this point in time.
It is currently a designated and generally accepted medium of exchange. Will it continue to be so? Probably not at its current levels, and more and more transactions will be denominated (preferred) in other asset classes, whose value is backed directly by taxing powers (e.g.,U.S., U.K., China, etc.).
That “use” of the Euro will decline, steadily, begining no later than 2014.
The Euro is a servicable unit of account, and under either that name or some similar configuration will continue to be used for many years since it reduces transaction costs.
The Euro is an unsatisfactory store of value
due principally to the fact that it represents debts of various sovereignties. The fluctuations in the values assigned by markets, etc., to those debts makes the store of value unstable. This will not improve and will likely deteriorate to an example of “Gresham’s Law.”
There is likely to develop, for use over an interim period, a two-tiered currency system similar to the the “blocked” Mark and internal Mark used in the 30’s by Germany. One form of Euro will be used within the markets of the subscribing nations, and another for trading with the external or global markets. The Purchasing Power parities will usually differ.
As with most attempts at inter-nation monetary arrangements (such as the late EMS) the Euro experiment as initially intended will have a limited life-span (20 years??) . This is due to the lack of “central” sovereignty, an absolute requirement for any fiat currency. Such sovereignty (wildly desired by a segment of the political class) is not in the cards of European traditions and trends in the developing Eastern regions.
Euros will become collectors items. A common unit of account will remain.
Greece will decide to default on their debts and will either be ejected from the Eurozone, the EU or possibly both.
This will start the dominos falling as banks who are exposed to Greek debt will either fail or be taken over by their governments. This will cause a cascade effect, resulting premiums rising for all threatened countries (Italy, Portugal, Ireland, Belgium, Spain, France – roughly in that order).
Those countries that are in or near a primary budget surplus will default (certainly Italy during 2012-2014) others will attempt austerity measures and to balance their budgets, but as soon as premium on government debt goes above about 8% – that’s effectively game over.
Collapse of the Eurozone to the core Northern European industrial countries (German, Netherlands, Austria + smaller members without debt problems).
Longer term (30-50 years), I can see EU transforming into a Federal EU core (France, Germany, Holland, Austria + smaller members) with a larger outer trade zone covering the current EU + Switzerland, some former Russian states, Yugoslavia’s broken pieces and Turkey.
Outer core will repeal non-trade related EU legislation (Human Rights, Working Time, etc.) and replace with their own laws.
What will happen to the Euro?
The same thing that will happen to all the other fiat currencies Natalie – it will collapse.
As for “when” – if I predict the time I would be a wealthy man (and I am not).
Like G.B. I can tell you what will happen, but WHEN is “all flat to me”.
However, it will happen over the next few years – you will certainly be around to watch the show and (hopefully) survive it.
My €0.017
Greece will attempt to default but the EU Commission will step in and take over fiscal policy, probably by inviting various leaders of the political parties in to “discuss” the issue. Fat pensions, cosy sinecures might be offered behind the scenes. That, or an opportunity to see what their intestines look like…
The EU will then proceed to do this for other failing countries, culminating in the attempt to impose central fiscal control. However all, including Greece, will find their populations or significant minorities thereof reject it, albeit for differing reasons and motivations. I suspect Italy will implode politically and an election result in unpredictable resutls with previously minority parties gaining sway, such as Fascist/Communists/Nationalists. Chaos.
While the attempt to impose fiscal control is in progress or just after it completes, which I think is unlikely, France will suffer irrecoverable banking collapses. Germany will at that point press the button and open the warehouses full of crisp new D-Marks and implement the plan they have had since before joining the Euro – how to withdraw from it. I think they know the lesson of not having a withdrawal strategy by now…
Germany and France will hate each other. Again.
Cue weeks of chaos as those in the know begin to enforce strict policies regarding who printed what Euro, once it is known that Germany will only allow conversion of German printed Euro notes and other governments begin to follow suit.
One wonders if any country decides to not create notes and coin but try to move directly to a purely electronic money system. Such a crisis is just the impetus to kick-start it. The Baltic States and Finland are my guesses as front-runners for such a step.
In all of this, I would not put it past Cameron to announce at some point that we join the Euro and merge all our reserves to “stabilise” it. Clegg, the Federast, almost certainly will propose it (his pension probably has a clause that he must…).
Should China be used as a source of assistance, I suspect they will demand hard collateral or actual assets for the help. Atlantic or Mediterranean blue water navy port, anyone?
I am a little less optimistic than most here that the band-aid will be ripped off so soon. To politicians, endless horror is much preferable to a horrible end. I think Greece will receive the €8 bln, which will keep them afloat for a few months. Meanwhile, the ECB will engage in massive QE – we saw what their first move was under Draghi. As you probably saw, CNBC reporter Silvia Wadhwa claimed before the announcement she will eat her hat if ECB cut rate – and after joked that she did not have her hat with her, but would bring it in the next day, along with something to wash it down. You can see Draghi here, saying that the securities market program is temporary and limited – thus it will not be, as nothing is certain until it is officially denied.
Europe will be in for the same never-ending anguish that Japan has been in for 20 years, and that the US is firmly in now. The ECB, just like the Fed, will be buying massive amounts of sovereign debt. Inflation will go up. New, creative measures of inflation will be invented. The will of the German people to exit the Euro will be subverted by their politicians; let’s also not forget that while the Germans are afraid of inflation, they really like a weak Euro, and they’ll certainly get it.
Summary: European politicians need a crapload of money, and can only get it from the ECB, i.e. by taxing stealthily the savings of Euro-holders. Expect the ECB’ mini-QE to “surprisingly” not only continue, but to explode.
I suspect that Plamus has it about right. “To politicians, endless horror is much preferable to a horrible end.” Well said.
I agree, Laird. I have just put up Plamus’ comment as a QotD.
It applies to many other situations as well as the one we are discussing, unfortunately.
A few facts…..
The British government (Chief Sec to the Treasury) says that it will commit up to 40 billion Pounds to the IMF for bailouts – but, have no fear, this is only a paper backing, the money will not actually be spent (oh dear…..). This is on top of an already vast government deficit (one of the highest in the world) and crushing taxes – 50% income tax (on “the rich” – does not stop the Church of England spitting on them, I thought “paying a fair share” was supposed to prevent that?), a 20% national sales tax (and on and on).
As for the “savage cuts” in various countries.
Government spending in Ireland is HIGHER (not lower) than it was before the “savage cuts” (oddly enough the msm tend to leave out the money spent on bailouts when they calculate Irish government spending).
And Greece?
In spite of the major banks not (yet) collapsing – the Greek government is managing to spend 8% MORE this year than it did last year.
And Britain?
Please see the first section.
If you see the streets of, for example, certain parts of London (as I did a few days ago) the goods in the shops and the clothing (and jewels and ….) of people walking the streets are astonishing.
It gives impression of an economy that is wildly successful.
However, sadly, it is based on….
Well it is based on very little.
The economy is actually mostly credit bubble.
Time scale 1 year: France looses its AAA credit rating as it falls into recession. This alters the basket of currencies used to calculate risk in the main government debt clearing houses and increases the margin required for trading in Italian bonds. The yeild on Italian bonds shoots up.
Time scale 1-2 years: Greece defaults properly on all of its debt, both debt held privately and that held by governmental organisations, because it simply cannot pay. With the exception of the French banks that expected their government to make good on their implicit promise to bail them out whatever happened the private financial instituations come through reasonably well as they had all already marked everything down to pretty well nothing. However the losses bankrupt the ECB forcing it to print money to cover the hole in its books. There is no actual inflation caused by this since there was an equal amount destroyed by the greek default, but it is a PR disaster for the EU in Germany.
Time scale 1-2 years: Silvio is finally crowbarred out of the Prime Minister’s office in Italy and escapes to some non-extradition country. He is replaced by an unstable leftish coalition who open up the books and find they have been cooked to a crisp. The ‘cuts’ that they campaigned against turn out to have been merely cosmetic, and much deeper ones are needed to stop Italy dropping into a compound debt spiral. However as an unstable leftish coalition they have even less stomach for making cuts than Silvio. So they decide to go Keynesian and try instead to grow their way out of trouble by throwing money at they special interests. Obviously it won’t work. A further 1-2 years after the Italian government falls apart and new elections are called as it becomes increasingly obvious that default is imminent.
A currency is primarily a means of exchange and secondarily a means to store wealth.
The Euro will survive in all the countries now using it and possibly some more- officially.
Far too many politicians careers depend on its survival for it not to.
Countries whose populace find another currency more useful will in practise switch to that currency- whether it be gold, silver, cigarettes, the dollar, or whatever- regardless that the Euro remains the official currency.
In time the alternative currency will receive official recognition as a parallel currency alongside the Euro.
In the end the Euro will be an official currency that nobody actually uses.